AUD/USD Analysis: A solid USD rebound prompts aggressive long-unwinding trade

• AUD/USD witnessed a sharp pullback from three-year tops amid resurgent USD demand.
• Surging US bond yields, the risk-off mood provided a strong boost to the safe-haven USD.
• A break below ascending trend-line support should pave the way for additional weakness.

The AUD/USD pair faced rejection near the key 0.8000 psychological mark and witnessed a dramatic turnaround from the three-year tops set on Thursday. As investors looked past Fed Chair Jerome Powell's dovish remarks during the congressional testimony, the US dollar was back in demand amid a sudden spike in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond rose beyond 1.50%, or more than one year high and provided a strong lift to the greenback. This, in turn, was seen as a key factor that prompted some aggressive long-unwinding trade around the major.

The US bond market continued reacting strongly to the progress on a massive US fiscal spending plan and the impressive pace of COVID-19 vaccinations globally. In the latest positive news, the US Food and Drug Administration indicated that it could grant emergency use approval to Johnson & Johnson's COVID-19 vaccine by the end of this week. Separately, the House version of the US President Joe Biden's proposed $1.9 trillion pandemic relief package is expected to get a vote as soon as Friday or over the weekend. The developments continued fueling reflation trade and pushing the US bond yields higher.

Meanwhile, the fixed income market rout raised fears about distressed selling in other assets and took its toll on the global risk sentiment. This was evident from a sharp pullback in the equity markets, which further benefitted the greenback's relative safe-haven status and drove flows away from the perceived riskier aussie. The pair retreated nearly 150 pips intraday and extended the retracement slide through the Asian session on Friday. The pair dropped to fresh weekly lows, further below mid-0.7800s and was pressured by the prevalent risk-off mood. Market participants now look forward to the release of second-tier US economic data for a fresh impetus later during the early North American session.

Short-term technical outlook

From a technical perspective, the pair was last seen hovering near a three-week-old ascending trend-line support. Given that bulls have struggled to defend support marked by the 38.2% Fibonacci level of the 0.7563-0.8008 latest leg up, some follow-through selling might accelerate the slide towards the 0.7800 mark. This is closely followed by confluence support near the 0.7785 region, comprising of 100-period SMA on the 4-hourly chart and 50% Fibo. level. A convincing breakthrough will be seen as a fresh trigger for bearish traders and pave the way for an extension of the corrective slide.

On the flip side, immediate resistance is pegged near the 0.7855 horizontal zone. A sustained move beyond has the potential to push the pair back toward the 0.7900-0.7910 region. The latter coincides with the 23.6% Fibo. level, which if cleared decisively will negate prospects for any further downside. The pair might then aim to surpass an intermediate hurdle near the 0.7935-40 area before making a fresh attempt to conquer the 0.8000 mark.